Red Ink and Education

Fiscal cliffs and walls are all the rage these days. One of the more curious financial facts about the United States is that it has a student debt bomb. Outstanding red ink collected by students for their education is over one trillion dollars.

Curious, I wondered if something similar could happen in India. Educational loans by state-owned banks have been rising quite dramatically, about 35% a year in the case of some banks, since 2003-04 and are beginning to weigh on their ledgers.

What was striking is how little debt Indian households are prepared to take on for education. Indicus Analytica, in its Indian Financial Scape survey, showed that only 0.55% of urban Indian households take educational loans.

While it is understandable that poor families would have difficulty getting a bank to extend them credit, the figure for even the most loan-prone demographic – urban households of western India with annual incomes between one million and two million rupees – is a mere 1.2%.

This struck me as surprisingly frugal. The educational sector in India is officially non-profit but Indians spend large sums on education. The single largest source of advertising revenue for the Indian print sector is normally education. This non-profit sector easily outspends real estate, financial services and fast moving consumer goods in advertising – often more than all three combined. There’s money in them than classrooms.

Of course, Indian higher educational institutions are dirt cheap compared to their US counterparts. Most colleges are subsidised heavily (and foolishly since this amounts to welfare for the middle class). So l took a look at education as a percentage of household expenses.

This proved remarkable. In the US, the bottom one-third spend nearly four per cent of their budgets on education. The top one-third spent only three per cent. But the middle one-third spent only one per cent – a figure that has remained constant since 1989.

Broadly comparable figures for India (broadly because they were in deciles and thus just a bit off when averaged) were 2.57% for the bottom one-third, 3.9% for the middle class and 8.1% for the upper classes. It reaches a remarkable 13.5% for the top decile.

And expenditure has been growing at a remarkable clip of 21.7% per year from 2004-05 to 2009-10. And it is irrelevant as to the income class. It was growing at 18.8% for the bottom decile and 24.3% for the richest tenth.

This is in contrast to the general stagnation of US educational expenditure. This is, one suspects, in part because the financial return on education in the US has been declining. US graduates, inflation-adjusted, earn the same in 2007 as they did in 1979. And the past few years it has gone in reverse – rising debts and falling income.

In contrast, in India each additional dose of education pushes one income up quite dramatically and the gains have been rising. A primary education means an income 21% more than an illiterate person. College education drives up the difference to 263%. World Bank figures show the financial return on education at every level have been rising steadily in India (not the case about 20 years ago).

My takeaway is that education in the US is proving less useful as a ladder for social mobility. Clearly poor Americans still believe it is – a disproportionate amount of the student debt is with black and Hispanic students and poor families, as shown earlier, spend more on education than anyone else. In India, it is accelerating as a means to rise up the income (and thus social) ladder. The growing spending on education also reflects the demand for private education in India and growing surplus income.

But the low levels of educational debt remain curious. This is almost certainly partly because of lower tuition, etc, costs. US colleges have become horribly overpriced since the early 1990s when fees began to accelerate much faster than consumer prices.

It also reflects, I presume, higher savings rate among Indians. It also may signal one benefit of having an extended family. Even as recently as 10 years ago, I used to get requests to chip in funds to help a poor relative through college. Spread across dozens of earning family members, the overall burden was quite light. It may also be that the Indian government’s decision to grant school tuition payments the same tax breaks that any form of investment gets helps keep the debt levels down. My child’s school fees match my mortgage as a tax break today. But the Indian debt figures will almost certainly rise – and they should as education improves as an investment.